March 6, 2013 9:27 am

L&G dividend rise allays investor gloom

Legal & General has unveiled a bigger-than-expected 20 per cent rise in its annual dividend, giving respite to investors in the insurance sector after the payout cut disclosed by rival RSA and concerns that Aviva might follow suit on Thursday.

L&G increased its annual payout to shareholders from 6.4p per share to 7.65p. Analysts had on average been expecting the total dividend to come in at 7.49p, according to the consensus forecast circulated by the company.

The plans came as Nigel Wilson, chief executive, gave hints of a forthcoming push overseas – particularly by the asset management business – from the group, which turns about 90 per cent of its profits from the mature UK market.

“We’ve got ambition with a little ‘A’ at the moment,” said Mr Wilson, who replaced Tim Breedon last year, of the group’s international expansion. He added he would like the company to have “ambition with a big ‘A’” and would consider bolt-on acquisitions.

“We’re only just beginning in Asia,” he added. “China’s the obvious place to start.”

Mr Wilson said the payout reflected L&G’s confidence in future cash flows amid what it sees as a range of positive trends in the group’s home turf, such as ageing populations and falling state spending on welfare.

The bullishness adds to the pressure on Aviva, a fellow FTSE 100 insurer, which reports its own annual results on Thursday. While most analysts expect Aviva to maintain its dividend, some suspect the group could cut it by as much as a sixth.

RSA shares fell heavily when it cut its final dividend by a third two weeks ago, blaming low interest rates for weakening investment returns.

However Mr Wilson said L&G was not particularly sensitive to the low interest rates that were cited as problematic by RSA, adding: “I think we have still got quite a lot of dividend headroom.”

The company said the cost of the 2012 total dividend would be covered 1.9 times by its net cash generation, leaving it with more room for dividend growth.

Shares in L&G closed up 2 per cent at 166p. They have increased in value by more than a third over the past year.

L&G reported an operating profit of £1.09bn, up 3 per cent. Pre-tax profit rose 56 per cent to £1.21bn. Diluted earnings per share rose 12 per cent to 13.66p per share.

Kevin Ryan, an Investec Securities analyst who has a “hold” recommendation on L&G shares, described the insurer’s move as “bold” given the net cash it generated during the year was “broadly flat” at £865m, compared with £846m in 2011.

“We view this as the key number in the results as this pays the dividend,” he said, adding that the impact of a regulatory shake-up of the way investments are sold in the UK was still not clear.

The company had been obliged to cut its final dividend by half in 2009 during the financial crisis.

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